Senate Finance Unit Votes to Axe 3 Percent Phone Service Excise Tax

Otero, Juan, Nation's Cities Weekly

The Senate Finance Committee approved legislation that would abolish a 3 percent federal excise tax on telephone services. S. 2330 - a companion to the House-passed H.R. 3916-proposed by committee Chairman William Roth, (R-DE), would immediately repeal the tax, which was called "discriminatory" by many committee members. The House version, which recently passed 420-2, would phase out the tax over three years, abolishing it by Oct. 1, 2003.

Estimates by the Joint Committee on Taxation said the Roth substitute would cost an additional $5 billion, but the measure passed the committee without opposition. One modification Senator Roth permitted to his bill came from Senator Kerry (D-Neb.).

The amendment calls for the General Accounting Office (GAO) and Federal Communications Commission (FCC) to report to Congress in one year on how much of the savings from the repeal is actually being passed on to the consumers. Democrats led by Senator Graham (Fla.) and joined by Senators Bryan (Nev.) and Robb (Va.) offered an amendment that would have forestalled the repeal of the excise tax until the solvency of Social Security and Medicare was ensured, but it failed on a party-line 9-11 vote. "Of all the taxes that could be repealed, I would not place the repeal of the 3 percent telephone tax as a very high national priority," Graham said.

Several Democrats, including Senators Graham, Robb and Baucus (Mont.) made clear they agreed with the merits of repealing the excise tax but were concerned about what position Congress might be in when later on it was faced with other tax cuts that seemed equally meritorious. Senator Baucus said that while some contend the repeal would reduce the digital divide, "in rural areas it will have no effect whatsoever."

The three- percent tax appears on each consumer's monthly telephone bill and applies to all local and long-distance telephone service, including the use of phone lines to access the Internet.

While the bill cleared the House with a large bipartisan majority, budget hawks are expected to fault the bill for not addressing general revenue loss of $5-$6 billion annually.

A Brief History of the Federal Excise

The federal excise tax on telephone calls (also known as the communications tax) originated on long distance service under the Spanish War Act of 1989. It is important to note that this tax was repealed in 1902, but reenacted as a tax on a per-message basis under the Act of October 22, 1914. Subsequently, the tax was repealed and reenacted several times.

The federal tax on long distance calls has been levied on a continuous basis since passage of the Revenue Bill of 1932. That law was passed largely because of the federal budget deficit which occurred when income tax receipts declined because of the Depression.

The tax extended to local telephone services a few months prior to the U.S. entrance into World War II.

In the 1960s, 1970s, and 1980s, the federal telephone excise tax was repeatedly imposed on a temporary basis. In general, the laws under which the tax operated called for a gradual phase-down in the tax rate before the total repeal of the tax. Often, revenue problems surfaced before the repeal date, and Congress responded by either increasing the rate in effect or continuing the rate and postponing the repeal. Prior to passage of the Revenue Reconciliation Act of 1990, the tax was scheduled to expire on December 31, 1990.

The federal excise tax on local and long distance service produces substantial revenues even at a tax rate of 3 percent.

The Internal Revenue Service reports that the tax reached a new record in collections of $4.9 billion in FY 1998. These taxes go into the general receipts of the U.S. Treasury, and are not dedicated to a trust fund or any other special purpose.

Effects on Telecommunications Taxes

A repeal of the federal excise tax on phone service could potentially call into question local excise taxes on telecommunications. …

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